Informing yourself about blockchain will inevitably take you to the exploration of new topics and terms. “Smart contracts” is one of those terms. It sounds very official and strict, and in a way it is. However, it appears that smart contracts are there to make our purchases, for example, easier, and the terms of the purchase (or any other transaction) more reliable.
How Do Smart Contracts Work?
Do you remember how various physical contracts have stipulations? A contract usually states that one party accepts to undertake certain obligations, and when that party executes them, the other will then provide something, etc. All parties in the agreement have to sign the agreement to show that they have no objections to the stated provisions and that they will comply.
When it comes to digital, smart contracts, users of the blockchain platform need to agree on the “rules of the game”, and to accept the way their data is represented, to agree with the rules of the transactions, as well as with the possible exceptions. Smart contracts also stipulate the ways in which possible disputes can be resolved.
What is unique is the fact that the entire process is automated. In order to enable the tasks to run smoothly, the developers have included “if/when…then…” statements that repeat themselves as long as needed or as long as there are conditions that need to be fulfilled.
In plain English: once a payment has been made, the network of computers will issue a ticket, for example. Or, once all the necessary docs have been provided, the system will register a new company, or a vehicle or whatever is in question… After that, the system updates itself. In short, there are no credit card verifications, no filling out the forms, no additional fees, and no dealing with the third party. Above all, everything happens within seconds.
Smart Contracts Overview
“Smart contracts” is the term used for lines of code that are stored on the blockchain. Therefore, we could say that a smart contract is an application that executes automatically once the predefined terms are met. A smart contract makes sure that all parties involved in the purchase or supply, for example, are certain of the final outcome. Furthermore, being based on blockchain, smart contracts are easily traceable, and act instead of an intermediary.
As a quick reminder, blockchain is a shared ledger where information about each transaction is stored and linked together. The info on each transaction is stored after validation, to ensure the accuracy. The details are also protected by few layers of encryption. The information stored on blockchain is usually referred to as “immutable” – meaning it cannot be changed or reversed.
Recap of the Advantages
- Saving on the fees for validation or verification of the data by a third party, as everything is done by the network of computers.
- Automatization, resulting in quick transactions in accordance with pre-defined rules.
- Accuracy, due to the exact terms stated in the app.
- Encryption, which secures execution of the transactions to be done and shared across all participants, excluding the possibility for the data to be tempered with.